Merrill reports $4.65 billion quarterly net loss

AlistairBarr

SAN FRANCISCO (MarketWatch) -- Merrill Lynch & Co. reported a $4.65 billion second-quarter net loss late Thursday as the brokerage firm was hit by more write-downs on large mortgage-related exposures.

The firm also said it agreed to sell its 20% stake in Bloomberg LP back to the media company for $4.425 billion. It also plans to sell a controlling interest in its Financial Data Services unit, which has an enterprise value of more than $3.5 billion.

Moody's Investors Service downgraded Merrill to A2 from A1 after the results.

The sale of the Bloomberg stake and plans to sell Financial Data Services will cushion the impact of Merrill's second-quarter loss on their firm's capital ratios, the ratings agency said. But it also warned that Merrill has lost some financial flexibility.

"Management's options to sell assets or raise more common equity to offset unexpected losses are now reduced given the difficult industry and capital markets environment," said Peter Nerby, a senior vice president at Moody's.

Merrill may suffer another $10 billion in pre-tax write-downs, mainly from exposure to CDOs and other mortgage-related securities, Moody's predicted. If losses exceed that, the agency said further downgrades may be needed.

Merrill shares fell 6.6% to $28.71 during after-hours trading on Thursday. The stock rallied almost 10% to close at $30.73 during regular trading.

Merrill
MER, -0.57%
said it lost $4.65 billion, or $4.97 a share, during the second quarter, compared to net income of $2.14 billion, or $2.24 a share, in the same period a year earlier. Excluding discontinued operations, the net loss was $4.6 billion, or $4.95 a share, Merrill said.

The firm was expected to lose $1.91 a share, according to the average estimate of 17 analysts surveyed by Thomson Reuters. Forecasts ranged from a loss of 70 cents a share to a loss of $4.21 a share.

During the real estate boom, Merrill built up large exposures to complex mortgage-related securities called collateralized debt obligations, or CDOs. The firm hedged some of these holdings by buying guarantees from bond insurers. Now that house prices are slumping and foreclosures are surging, the broker is having to write-down the value of these exposures.

Merrill reported $3.5 billion of net losses from its exposure to so-called super senior CDOs. The firm took another $2.9 billion hit from the falling value of hedges it bought from bond insurers.

Merrill took another $1.7 billion in net losses from the investment portfolio of its U.S. banks and $1.3 billion in write-downs on residential mortgage exposures.

Deutsche Bank analyst Mike Mayo was expecting Merrill to report write-downs of roughly $5 billion on its CDO exposures, with another $2.2 billion of write-downs from its bond insurer exposure and $1.8 billion from residential mortgage securities.

"Write-downs of mortgage and lending commitments and hedging losses totaled $9.7 billion, and sizable gross exposure remains," Matthew Albrecht, an analyst at Standard & Poor's Equity Research, said in a note to clients on Thursday. "We see further write-downs until some stabilization in the housing market and economy occurs. Meanwhile, a number of challenges remain."

Merrill raised capital selling new securities earlier this year, but is having to find other ways of boosting capital now. See related story.

The firm said late Thursday that it agreed to sell its Bloomberg stake for $4.425 billion back to the media company, which is owned New York Mayor Michael Bloomberg.

Another $3.5 billion may be raised by selling Financial Data Services, a unit that provides administrative support to mutual funds, along with retail banking products and other services within Merrill's large wealth management business.

The broker is lending money to Bloomberg to help the media company buy its 20% stake. Merrill also plans to lend money to the buyer of Financial Data Services.

Merrill said the deals may raise roughly $8 billion, which would help replenish capital that was depleted by the second-quarter write-downs.

Merrill didn't sell any of its stake in asset-management company BlackRock Inc.
BLK, -0.72%
The broker owns almost 50% of BlackRock. The stake is seen as strategically important for Merrill and an attractive source of future profit growth.

Merrill Chief Executive John Thain told analysts during a conference call that the firm is comfortable with its current capital position.

The broker cut assets during the second quarter. Net exposures to CDOs of asset-backed securities stood at $4.5 billion at the end of June, down from $6.7 billion at the end of the first quarter.

Net exposures to prime residential mortgages rose 10% to $33.7 billion in the second quarter as Merrill's First Republic Bank unit continued to offer home loans to its rich customers.

Other residential mortgage-related exposures, including subprime and so-called Alt-A securities, dropped 25% in the period, Merrill said. But the firm still has $10 billion of exposure to these types of assets.

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